Europe Pushed by IMF’s Lagarde to Consider Greek Debt Write-Off

IMF Managing Director Christine Lagarde said in Washington yesterday, “The Greek debt will have to be addressed.” Photographer: Andrew Harrer/Bloomberg

Sept. 25 (Bloomberg) -- The International Monetary Fund
pushed European policy makers to consider writing off some aid
to Greece, widening the fight to keep the 17-nation euro zone
from splintering.

“The Greek debt will have to be addressed,” IMF Managing
Director Christine Lagarde said in Washington yesterday. The IMF
has indicated that additional aid for Greece will have to come
from Europe, suggesting that the euro area may need to consider
losses on bonds held by the European Central Bank or loans
extended by governments.

Greece’s financing gap won’t be solved with the budget
measures being discussed because its growth prospects are too
weak, Lagarde said at the Peterson Institute for International
Economics in Washington. She said efforts to find 11.5 billion
euros ($15 billion) in additional savings won’t be enough to
shore up the bailout jointly supervised by the IMF, the European
Commission and the ECB.

The comments by Lagarde, who is scheduled to meet German
Chancellor Angela Merkel in Berlin tomorrow, put pressure on the
euro zone to grant Greece further relief by restructuring its
debts. Greece has received 240 billion euros in aid pledges in a
pair of bailout packages. Investors took losses in a debt
exchange this year, losing 53.5 percent of the face value of
their holdings and reducing the country’s debt by about 100
billion euros.

Because there is so little debt left in private hands,
Europe may now need to pick its moment to tackle so-called
official-sector involvement, said Carsten Brzeski, senior
economist at ING Groep NV in Brussels.

‘Very Touchy’

“This is exactly the road we’re taking, but it is
politically very, very touchy,” Brzeski said in a telephone
interview today.

Brzeski estimated the ECB holds about 40 billion euros in
Greek debt acquired through its Securities Market Program, which
so far has maintained seniority over other creditors, as well as
more bonds accumulated through other operations. Euro-area
nations provided about 53 billion euros in bilateral loans to
Greece as part of an initial bailout program.

German officials so far have ruled out debt writedowns.
Michael Meister, finance spokesman for German Chancellor Angela
Merkel’s Christian Democratic Union, dismissed speculation that
Greece’s official creditors will be forced to write off some of
their exposure.

German Reluctance

“How could we possibly do that,” he said in a Bloomberg
Television interview yesterday. “Where would it stop? We’re
talking about loans from as recently as last year. The German
parliament would not go with it.”

Greece must keep cutting its debts as a condition of
accessing its bailout funds while its economy remains mired in a
fifth year of recession. Two Greek elections have produced a
shaky governing alliance of pro-euro politicians under constant
attack from the anti-bailout opposition.

The so-called troika that represents international lenders
has agreed to take a week-long break from inconclusive talks
with Greece to carve out the new budget package. Lagarde’s
comments suggested an agreement may have to go beyond these
measures.

Lagarde signaled that the IMF won’t budge on Greece’s
targets, which call for reducing debt to 120 percent of its
gross domestic product by 2020. This goal “is still clearly the
horizon that is set in order to measure the efforts to be
undertaken by then,” she said in yesterday’s speech.

She continued to indicate that Greece may get more time to
meet its obligations, noting that the IMF has recommended
slowing the pace of fiscal adjustment for Portugal and Spain. At
the same time, Lagarde said the euro area needs to find a
permanent solution.

“The last thing we want is for programs to be off track
and off track and off track again,” Lagarde said.